Households who recently renewed their home or car insurance were probably shocked by the increase in their monthly premiums. But why are insurance premiums still rising despite inflation having more than halved?

The average quoted price for home contents insurance rose 41.6% in the 12 months to April, with the most commonly quoted price for annual home contents insurance ranging between £150 and £199, according to data analytics firm Consumer Intelligence.

This represents the largest annual increase since Consumer Intelligence began tracking home insurance prices in 2014.

The biggest increase in home insurance quotes in April was seen among London households, which were 49.9% higher than a year earlier, closely followed by households in the South East and East of England, where quotes rose by 45.8% and 41.9% respectively.

Overall, offer premiums have increased by 68.8 percent since February 2014.

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“The market has experienced inflation in each of the last 12 months. The last three months were the highest in the last 10 years, surpassing the 10% in the third quarter of 2023,” said Matthew McMaster, senior insight analyst at Consumer Intelligence.

Customers who had already reported a building insurance claim had to pay an average of 50.3 percent higher prices than in the previous year. For customers who had not reported any claim, the increase was slightly lower at 40.9 percent.

Average home insurance premiums increase 19% annually

Looking at prices paid rather than quotes, the average home contents insurance policy rose by 19%, or £60 annually, in the first quarter of 2024, according to figures from the Association of British Insurers (ABI).

The average premium for home contents insurance (combined buildings and contents insurance) rose from £315 in the first quarter of 2023 to £375.

While insurance premium increases have typically followed inflation in the past, they have recently risen significantly faster than average reported inflation rates.

Inflation in the UK hit a 41-year high in October 2022, rising to 11.1% due to rising energy and food prices.

According to figures from the Office for National Statistics (ONS), it has since fallen to 2.3 percent in March, the lowest level in almost three years.

Drivers must expect 25% higher premiums

In the case of motor insurance, premiums for drivers rose by 25% in 2023 compared to the previous year, so the ABI launched an action plan to curb costs.

Motorists paid an average of £543 in 2023, up from £434 in 2022. ABI figures showed that the average premium in the last three months of 2023 rose 12% quarter on quarter – from £562 to £627. In the first quarter of the year, premiums rose 1% to £635.

The story continues

What drives up insurance costs?

If inflation falls, what drives premiums in the opposite direction?

There are many factors to consider when setting a premium, but the main reason people pay more to drive on UK roads is the cost pressure on insurers.

Repair costs rose 32% to £1.6 billion in the third quarter of last year, out of a total of £2.54 billion. This is due to labour, energy and vehicle costs becoming increasingly sophisticated, with electric vehicle repairs requiring ever greater specialist skills.

Other cost factors cited by insurers during the same period included longer repair times, which drove up the cost of providing replacement vehicles by 47 percent.

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The end result is that insurers spend more on claims and costs than they earn in premiums.

“We recognise the impact that rising car insurance premiums continue to have on motorists. Rising repair costs and other factors outside insurers’ control mean there is no single measure that can reduce premiums. However, we are determined to do everything we can to put the brakes on,” said Mervyn Skeet, ABI’s director of general insurance policies.

Car insurance leads claims settlement

Matt Brewis, director of insurance at the UK’s Financial Conduct Authority (FCA), told MPs in April he had heard “heartbreaking stories” of people trying to make ends meet while costs such as insurance rose.

“It is clear that there has been a significant increase in the price of motor and home insurance over the last two to three years,” Brewis said at the Finance Committee hearing on the insurance market.

“Auto insurance is where we see the most complaints,” Brewis said.

Research by consumer organisation Which? found that some people who were unable to pay their insurance premiums up front were charged high interest rates on their monthly payments.

“Motorists need car insurance to be able to drive legally on the road and the vast majority of mortgage lenders insist that homeowners are covered – yet those who cannot afford to pay their premiums in one go are penalised with horrendous interest rates,” said Rocio Concha, director of policy and advocacy at Which?

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“The regulator has made it clear: paying for insurance monthly is a tax on poverty and it is shocking that providers still try to justify this practice. Given that many companies’ interest rates do not seem to reflect the small amount of risk they take, customers who pay monthly are being charged disproportionately more than customers who pay annually,” she added.

Bad weather hiking prices

In the case of building insurance, bad weather is to blame for the rising prices, according to those in the industry.

According to ABI, 2023 was a year marked by bad weather, with weather-related home insurance claims totaling £573 million.

Towards the end of the year, storms Babet, Ciaran and Debi caused £352 million worth of damage to homes.

The insurance carrier explained that flooding causes most of the weather-related damage.

In addition to flood protection, Louise Clark, ABI general insurance policy adviser, said: “There are also other important steps we need to consider, including reforming planning laws to prevent housing being built in high flood risk areas and a greater focus on climate-resilient properties.”

Watch: Lloyd’s of London explains why insurance premiums are rising

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